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Prime Minister Justin Trudeau addresses the media during a tour of the Stellantis Windsor Assembly Plant on Jan. 17. Mr. Trudeau’s government has expressed openness to increasing the subsidies for Stellantis and LG, to bring them closer to what is being offered to Volkswagen.REBECCA COOK/Reuters

A standoff over government subsidies for the first electric-vehicle battery plant being built in Canada has dramatically escalated, bringing into public view the bind in which Ottawa finds itself as other automakers demand public backing comparable to the unprecedented sums recently committed to Volkswagen for another battery factory.

The companies behind the first plant, Stellantis NV STLA-N and LG Energy Solution, announced on Monday that they have stopped all construction on the $5-billion project in Windsor, Ont., “effective immediately.” Just three days prior, the companies had made a surprise public statement saying they were developing “contingency plans” to relocate their facility.

Stellantis and LG issued a brief statement on Monday attributing the stoppage to Canada “not delivering on what was agreed to,” and did not offer further comment. But government and industry officials suggested that the issue is money – specifically how much additional government funding will be made available to the project, beyond the roughly $1-billion pledged by the federal and Ontario governments when Stellantis and LG committed to Windsor last year.

That commitment was made months before the United States government implemented the Inflation Reduction Act, which offers many billions of dollars in production tax credits to comparable battery facilities in the U.S., and prompted Stellantis and LG to begin making inquiries about Ottawa’s willingness to increase its support.

The demands from the companies intensified after Ottawa proved willing this spring to match the U.S. subsidies in the case of the Volkswagen battery plant in St. Thomas, Ont., for which it committed as much as $13-billion over the next decade.

Prime Minister Justin Trudeau’s government has expressed openness to increasing the subsidies for Stellantis and LG, to bring them closer to what is being offered to Volkswagen. On Monday, Finance Minister and Deputy Prime Minister Chrystia Freeland signalled optimism about resolving the current dispute.

“I’m confident that we’re going to get there, because I know there is goodwill among all the parties,” Ms. Freeland told reporters.

Opinion: Volkswagen, then Stellantis: Billions for battery plants, but little on mines for raw material

The Stellantis-LG factory is considered pivotal to Canada’s aspirations of developing a full electric-vehicle supply chain. Alongside the Volkswagen plant, it is meant to attract investment in a range of business areas, including the mining of battery components, parts manufacturing, vehicle assembly and battery recycling.

But the pressure from Stellantis and LG has exposed some discomfort in Ottawa about continuing to use federal dollars to try matching the U.S. levels of support for the growing EV industry. And it has turned up the heat on a simmering dispute with the Ontario government over whether it should also bear some of that responsibility.

Ms. Freeland touched on the federal-provincial dynamic, noting that “the resources of the federal government are not infinite.” In addition to “counting on Stellantis to be reasonable,” she said, her government is “counting on Ontario to do its fair share.”

Industry Minister Francois-Philippe Champagne echoed that sentiment in a Twitter post hours later. “We’ve always said we will be competitive with the U.S. when it comes to the auto sector,” he said. “But we need to work together at all levels of government. What we now need is for Ontario to pay its fair share. Full stop.”

A senior federal official close to the talks, whom The Globe and Mail is not identifying because they were not authorized to speak publicly on the matter, was more expansive. The official suggested that beyond just negotiating with Stellantis and LG in the coming days, Ottawa will also be negotiating with Ontario to get it to provide a portion of the subsidies needed to keep the project in Windsor.

The official said that while the Ontario government has traditionally shared the cost of financial support for the auto industry centred in that province – and did so by putting up about half of the roughly $1-billion initially committed to Stellantis and LG – it has so far shut the door on increasing its subsidies to help match the Inflation Reduction Act.

Speaking to reporters on Monday, Ontario Premier Doug Ford portrayed that form of cross-border competitiveness as solely Ottawa’s domain.

“We’ll go toe to toe with any state, down in the United States,” Mr. Ford said. “The only thing we can’t do is go toe to toe with the U.S. federal government. That’s the federal Canadian government’s job, and they can do it.”

By Mr. Ford’s account, his government has not even been privy to negotiations related to Inflation Reduction Act matching. He said that in addition to giving $500-million each in investment subsidies to the Stellantis-LG and Volkswagen factories, the province is providing additional infrastructure, such as roads and energy.

“They need to come up and support Stellantis like they did with Volkswagen,” Mr. Ford said.

Despite the seemingly unwieldy dynamics of two levels of government struggling to get on the same page to avoid losing a pivotal clean-economy investment, auto-industry veterans said such haggling is common, though it is usually conducted behind closed doors.

”We’re seeing the sausage-making, and normally we don’t,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association.

The way the negotiations have spilled into public is attributable partly to the Inflation Reduction Act laying plain the current going rate for auto subsidies. Whereas the terms of negotiations between automakers and governments had often been closely guarded secrets previously, the U.S. legislation guarantees annual tax credits correlated to units produced, effectively challenging other jurisdictions to match them.

Stellantis and LG’s escalation also likely relates to the current stage of their investment and planning. The deeper into construction the project in Windsor gets, the less practical it will be for them to abandon their investment. And if they were to begin elsewhere, they would have to launch construction very soon to have any chance of starting to produce batteries at the facility in 2024, which is their stated goal.

Mr. Volpe, along with the federal official, cited the improbability of the companies even now accepting their sunk costs in Windsor, let alone being able to achieve their target dates elsewhere. They said these are reasons to believe a deal will be worked out.

Not everyone is quite as sanguine.

“I’ve never seen brinksmanship of this sort,” said Greig Mordue, a former auto-sector executive who chairs advanced manufacturing policy at McMaster University’s engineering school. “So I would assume that it’s not brinksmanship.”

With a report from Jeff Gray

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